Where To Invest $100,000 In 2023

Co-produced with Treading Softly

The new year has arrived and here we are.

We are doubtlessly going to be inundated with the cliches that arrive this time of year. The idea that we’ve “turned a page” or “started a new chapter” or “have a blank slate,” will abound. So I decided to ask myself a different but related question:

“If I had $100,000, where would I focus on investing it, today?”

The market indexes exited 2022 with one of the worst returns for a year on record. 2023’s outlook remains bleak with recession risks looming larger and larger, a Federal Reserve primed to continue hiking rates in the midst of a weakening economy, and global inflation remaining stubbornly persistent, one might be tempted to sit in all cash and do nothing.

I am not among that crowd. Why? It’s a simple understanding that I believe time invested in the market is more important than trying to time it. Countless people have tried to game the market and claim big rewards. They turn investing in stocks into a casino, where they might make a lot of money on terrible companies doomed for bankruptcy with lucky timing, or lose a lot of money on great companies with unlucky timing.

Yet, over the long haul, those aces come and go. I can’t even remember all of the “Wall Street prodigies” that had their 15 minutes of fame because of a handful of good calls. The investors who stand the test of time are those who don’t try to time the market at all but simply remain committed to being invested in it. The billionaires don’t dodge in and out of stocks making 3-6 month trades. They don’t measure their success in months, they measure it in decades.

My personally created methodology is aptly named “The Income Method.” I’m not a marketing guru, so I named my methodology to be as straightforward as possible. It’s my personal method of using the market to generate income. It can be described as a mix of value investing, contrarian viewpoints, and dividend investing. At its core, I do not measure my portfolio by the current liquidation value. I measure it by the income that it is producing and will produce in the future. Altogether, my portfolio boasts yields of over 9% on average, a history of income growth, and capital appreciation.

So if I were starting out with $100,000, I would be first and foremost creating an income portfolio aimed to generate high levels of income today and see growing income through reinvestment for tomorrow. I recommend reinvesting 25% of dividends received back into your portfolio at a minimum. – my Rule of 25.

Alongside my Rule of 25, I have another guideline – to hold no less than 42 individual holdings, my Rule of 42, to create a high degree of diversification. This helps ensure that if one company in my portfolio tanks or goes under, my overall portfolio is not capsized.

Let’s dive into a big-picture painting.

Fixed Income As A Foundation

For a portfolio focused on income, it must sit upon a strong foundation. My new portfolio, its foundation will be built with fixed-income investments such as preferreds, bonds, and baby bonds.

There are multiple positives to doing this:

• They experience fewer income fluctuations
• They see less price volatility due to PAR values vs. common shares of the same firm
• Preferred and baby bonds are just as easy to purchase as common shares.

Fixed income is beneficial in that it is precisely that – fixed. The income provided by most preferreds, bonds, and baby bonds is preordained when issued. You know exactly what the company owes you and exactly when it is supposed to pay.

I focus on preferreds from solid, reliable companies with strong coverage of what must be paid. I give special focus or attention to pass-thru entities like REITs and CEF preferreds, as well as MLP preferreds, due to the prevalence for there to be higher common distributions. These common distribution provide a buffer and an early warning system. The common shares cannot receive a penny if the preferred are not paid as agreed.

For bonds, the company cannot decide to skip payments willy-nilly. Default is only one missed payment away. It is debt, it is owed, and the lenders have legal recourse if it is not paid as agreed.

With a new portfolio in 2023, I would focus primarily on fixed-rate preferreds and bonds. Many fixed-rate preferreds are trading at significant discounts – boosting their yields and offering attractive capital gains if/when they are called away. Create a base of income that you can rely on whether there is a recession or not.

Utilities & Infrastructure

Understand that no portfolio exists in a vacuum, we must be cognizant of the ongoing economic situation – caution and careful planning are a must. To achieve this level of caution, I would focus on investing in stable and healthy utilities and infrastructure-related funds and companies. I personally would stray toward funds that hold such investments as their cheaper leverage costs enable them to pay larger dividends which also see stable NAVs or rising NAVs.

Utilities are often described as bond alternatives due to their low-risk structure and stable or growing yields.

REITs

Equity REITs – like Realty Income (O) – and Mortgage REITs – like Annaly Capital (NLY) – are both able to thrive in recessionary environments. Even during economic slowdowns, companies tend to continue paying rent. The agency MBS that companies like NLY invest in, tend to become more valuable because the principal is guaranteed.

Being exposed to rising property values and being a landlord over a shopkeeper means the ability to continue to gain income from the most basic need of the economy – a place to operate one’s business.

Being exposed to mortgages means the ability to continue to gain income from the most basic need of consumers – a place to live.

Financial Sector/Credit Products

The last area of focus in my new portfolio would be the financial sector. Many are still suffering PTSD from the Great Financial Crisis. They fear financials at the slightest whiff of recession. Do not let recency bias creep in. Every recession hits certain sectors harder than others. The last recession focused on the housing sector and mortgages. It was a recession that was caused by years of irresponsible lending and a house of cards in the financial sector.

This recession is highly unlikely to be a repeat as mortgage and bank regulations were strongly “beefed up” after the last downfall. During COVID, companies and consumers took time to improve their balance sheets. We haven’t seen the borrowing excesses that we saw before the GFC. A financial crisis will always cause a recession, but not every recession results in a financial crisis. Banks today are very well-capitalized and from a credit standpoint, a recession is likely to be mild. Much more like 2001 than 2008.

Outside of investing in banks and other financial sector companies. I would also buy into funds holding credit products – loans, bonds, etc. These would be the all-star PIMCO funds, for example. Bonds and loans generally have experienced a strong sell-off as rates have risen. These bonds and loans are still mature at PAR but trade hands for cheaper. Funds have been able to buy more bonds on the cheap and will benefit from their rapid appreciation when the Federal Reserve changes course. In the meantime, they are getting higher yields from their new holdings and are able to strongly cover their distributions – and pay handsomely in special dividends as required.

Conclusion

So, in 2023, where would I invest $100,000? These are the areas I would have my portfolio focused on. They provide large sums of reliable income and a high degree of safety from a recession looming on the horizon.

As an income investor, a market is a place I visit only when I need to. It pays me to be passive and uninvolved. I don’t need to make daily trades or weekly movements. It pays me, and I reinvest my dividends to continue to see more income growth each year.

This way, I have all the time possible to enjoy my hobbies and interests. It’s time to discover a new you in 2023. Perhaps the new you wants an easier portfolio to manage and oversee – that’s what income investing offers you. Our Income Method is specifically designed to provide the maximum reliable income with the minimum upkeep possible.

You can make a similar portfolio all on your own as well. I believe in you! Let’s make 2023 the best year for you yet – with less stress and money more!